Petition — Collins v. Johnston

’%

Office - Supreme Court, U.S.

| g 0 FILED

! “1754 APR 20 1981

No. ———-—

TEVAS,

‘ii CLERK

IN THE

Supreme Coot of the United States

OCTOBER TERM, 1980

WEBSTER A. COLLINS, HERBERT R. MORRISON,

HELEN O. MORRISON, AND GLEN A. WILKINSON,

+ Petitioners,

DAvID R. JOHNSTON, THE NORTHWESTERN BANK,

AND JAMES. R. GILLEY,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

CALVIN H. Coss, JR.

(Counsel of Record)

STEPTOE & JOHNSON

1250 Connecticut Avenue, N.W.

Washington, D.C. 20036

(202) 862-2000

T. WINFIELD BLACKWELL, JR.

JACK F. CANADY

BLACKWELL, BLACKWELL,

CANADY & ELLER

2100 Wachovia Building

Winston-Salem, N.C. 27102

(919) 722-7161

HENRY A. MITCHELL, JR.

CARL N. PATTERSON, JR.

SMITH, ANDERSON, BLOUNT,

DORSETT, MITCHELL &

JERNIGAN

P.O. Box 31

Raleigh, N.C. 27602

(919) 821-1220

Attorneys for Petitioners

SO SRS EOE REPENS RRR A RTS

- 789-0096 - WASHINGTON, D.C. 20001

WILSON - EPES PRINTING Co., INC.

-%

QUESTION PRESENTED

Whether a reorganization trustee may, in order to re-

lieve the debtor’s estate of claims by defrauded investors,

cooperate with those investors by paying their costs in a

joint lawsuit asserting related claims against the debt-

or’s former management and others charged with de-

frauding the debtor and its investors.

(i)

,

TABLE OF CONTENTS

Page

QUESTION PRESENTED ....................-... é ‘ i

yp SS Be lt) gL) yy i En DCTS iv

er AE UN icteritericcines cinlisorteneioesssionpta 1

P JURISDICTIONAL STATEMENT .................--...---------- 1

z APPLICABLE STATUTES AND REGULATIONS... 2

STATEMENT OF THE CASE .......0.0022222222..----:0se--e0ee--- 2

REASONS FOR GRANTING THE WRIT .................... 8

I. THE DECISION OF THE COURT OF AP-

PEALS RAISES AN IMPORTANT AND RE-

CURRING QUESTION CONCERNING THE

AUTHORITY OF THE TRUSTEE IN REOR-

GANIZATION WHICH URGENTLY NEEDS

RESOLUTION BY THIS COURT .................... 8

II. REVIEW OF THE JUDGMENT BELOW IS

REQUIRED TO RESOLVE THE CONFLICT

TERE WE SIETS. WRMIUIEED cececieerscccssesesincontonncenbonencie 18

GPL ILIIIIM, ssshtieseriecpnescvin ncpesscniunemninesiatoneniealbibiadetiaiieedtt 20

(iii)

PRECEDING PAGE WAS BLANK |

-%

iv

TABLE OF AUTHORITIES

Cases

Page

American Employers’ Insurance Co. Vv. King Re-

sources Co., 556 F.2d 471 (10th Cir. 1977) -....... 13

In re Associated Gas & Electric Co., 149 F.2d 996

(2d Cir.), cert. denied, 326 U.S. 736 (1945) -....... 13

Caplin v. Marine Midland Grace Trust Co., 406

A SO Se ited nonnee 10, 14, 15, 16, 17

Carpenter Vv. Hall, 311 F. Supp. 1099 (S.D. Tex.

Odo indcnces shied aeptenlesideeconeicalniiinabecntiibaladaaeenesin 13

In re Credit Industrial Corp., 366 F.2d 402 (2d

RS GMI DRE SRR SEN 6 SNOT ARO 13

Dietrich Corp. v. King Resources Co., 583 F.2d

ae Re | SPR ee a 13

Dorfman Vv. First Boston Corp., Fed. Sec. L. Rep.

(CCH) 7 94,155 (E.D. Pa. 1978) ........................ 13

In re Equity Funding Corp. of America, 519 F.2d

TE Ce Ne BE archer ciceticraindalies ic Bctccntes 12, 18

In re Equity Funding Corp. of America, 416 F.

Supp. 182 (C.D. Cal. 1975) ...................... 12, 18, 17,18

In re Farrington Manufacturing Co., 540 F.2d

ih ictaleitigercinne icicsiasnsleiyrmnacestmesns 18, 15

In re Four Seasons Nursing Centers of America,

Inc., 472 F.2d 747 (10th Cir. 1973) ................... 18

In re Four Seasons Nursing Centers of America,

Inc., 357 F. Supp. 594 (W.D. Okla. 1973) -......... 12, 18

Gilbert v. Bagley, 492 F. Supp. 714 (M.D.N.C.

WOOD: » vocsciesieatesctanidivensacimatadaaiivaiiadaticnagidiplies 14

Marrero Vv. Abraham, 473 F. Supp. 1271 (E.D. La.

BIPEA sciegsthisclun tice abdcebsbnietinctnbasteon bgaiesoriciaiinimaisanillaaiaio bode 16

McLean V. Alexander, 449 F. Supp. 1251 (D. Del.

1978), rev’d on other grounds, 599 F.2d 1190

Ee HD PIII TIE incvctnsniichsnietnaaeiatlentecststighabeiiibbantiasebee 16

Northwest Airlines, Inc. v. Transport Workers

Union, 49 U.S.L.W. 3428 (U.S., argued Dec. 2,

I re <I a sinsiniresnsecrmandniainhnsttiielacionnenas 17

SEC v. American Trailer Rentals Co., 879 U.S.

Ge TM TE ES Pee ian Orne Deo oo: ASS cP 8

SEC v. Capital Gains Research Bureau, Inc., 375

CE, Be CD einen cstctaitngia tian 8

Vv

TABLE OF AUTHORITIES—Continued

Page

Wallenius Bremen G.m.b.H. Vv. United States, 409

F.2d 994 (4th Cir. 1969), cert. denied, 398 U.S.

|. eR SREB “EE AS a SEY Fe 17

In re Washington Group, Inc., 476 F. Supp. 246

ry A”, | RRRSEREE Doe ete Be ARE ee ee eT Decree 12, 15

Statutes and Regulations

ee ee newnsiensbeumemension 8

py eS SE ER a 2,3

I i noone senennnscocennereins 8

pba Tots fv. 0 GE e | (\ ) aan SEER ' 12

Fe ee I Cai rcisciaeiteticictesascvoncrspinitacepnicconsies 12

Se es ND | ereathaciteg Rareicsteeitecnsewcetetons 2,10

11 U.S.C. §541(a)-(b) (Supp. III 1979) ........... 10

11 U.S.C. §567(1), (8), (5), (6) (1976) -........ 10

Oe IED oi ccd igs censcpniadiiscibninnacccaceones 2,10

cca sesvcrpanedenworeontinives 2,10

a oackscnmcetemevenonnonousine 10

py DL SSS NEE 2,10

11 U.S.C. $1102 (Supp. III 1979) .............000..... 9

11 U.S.C. $1108 (Supp. III 1979) -.......0..00000..... 9

11 U.S.C. $1104 (Supp. III 1979) ....................... 9

11 U.S.C. §1106 (Supp. III 1979) -.................... 10

11 U.S.C. §1107 (Supp. III 1979) -.................... 10

11 U.S.C. §1108 (Supp. III 1979) ...................... 10

11 U.S.C. §1109(a) (Supp. ITI 1979) ............... 9

1 Ue 8 ae eee Tan ESTO) ...............<........ 9

11 U.S.C. prec. 101 note (Supp. III 1979) .......... 8

BS eR Rg GR). | | eae ne 2

SU PI TE IID Gases resceensocccrscteressecocmiculsiianss 8

Miscellaneous

Admin. Office of the U.S. Courts, Tables of Bank-

ruptcy Statistics (1979) ......................-.-.cccccecceeeeee 12

Annual Report of the Director of the Administra-

tive Office of the United States Courts (1979 &

UE I Sidi sraskestitninsia bssbicatiadisiidbestiknapaescimesebiiiewses 12

4A Collier on Bankruptcy (14th ed. 1978) ............. 10

°- *.

vi

TABLE OF AUTHORITIES—Continued

Fischer, Contribution in 106-5 Actions, 33 Bus.

a Fe ED ein eicscsidecndccnsentinictsincnttnetbhbicicbendinte

Proposed Chandler Act: Hearings on H.R. 6439

before the House Comm. on the Judiciary, 75th

ce Gp Ree ee eee

H.R. Rep. No. 1409, 75th Cong., Ist Sess. sere

Restatement of Security (1941) Ps

Restatement (Second) of Agency (1958) ...............

SEC, Report on the Study and Investigation of

the Work, Activities, Personnel and Functions

of Protective and Reorganization Committees

NII ck.cincviiucnneethcnahatetiighacntagtintinlebesbaadiiubii

Page

IN THE

Supreme Coat of the United States

OCTOBER TERM 1980

No.

WEBSTER A. COLLINS, HERBERT R. MORRISON,

HELEN O. MORRISON, AND GLEN A. WILKINSON,

i Petitioners,

Davip R. JOHNSTON, THE NORTHWESTERN BANK,

AND JAMES R. GILLEY,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

Webster A. Collins, Herbert R. Morrison, Helen O.

Morrison, and Glen A. Wilkinson respectfully pray that a

writ of certiorari issue to review the judgment of the

United States Court of Appeals for the Fourth Circuit

in this case.

OPINIONS BELOW

The opinion of the district court is reported at 476

F. Supp. 246 (M.D.N.C. 1979). Appendix at 4a through

14a. The opinion of the United States Court of Appeals

for the Fourth Circuit has not been reported. Appendix

at la through 3a.

JURISDICTIONAL STATEMENT

The judgment of the United States Court of Appeals

for the Fourth Circuit was entered on November 4, 1980.

Appendix at 25a through 26a. A timely Petition for Re-

2

hearing and Rehearing En Banc was denied on January

19, 1981. Appendix at 27a through 28a. The jurisdiction

of this Court is invoked under 28 U.S.C. § 1254(1).

APPLICABLE STATUTES AND REGULATIONS

Sections 70(a), 186, 187 and 189 of the Bankruptcy

Act, 11 U.S.C. §§ 110(a), 586, 587 and 589 (1976), and

Rule 10-208(a) of the Federal Rules of Bankruptcy Pro-

cedure are set forth in the Appendix at 29a through 38a.

STATEMENT OF THE CASE

Petitioners seek review of the decision of the court of

appeals denying the Washington Group’s reorganization

trustee any power to cooperate with the company’s de-

frauded investors by paying their costs in a joint lawsuit

asserting overlapping claims’ against the company’s

former management and others charged with defrauding

the investors.? Despite the fact that the trustee’s coop-

eration with the investors would have benefited the debt-

1 As used herein, the phrase “overlapping claims” refers to

claims that, although not identical, share common factual and

legal bases and are asserted by the trustee and the defrauded

investors.

2 The bankruptcy court initially authorized the trustee to fund

two companion civil actions related to the reorganization proceed-

ings described herein. Gilbert’ v. Bagley, No. C-78-335-WS (M.D.

N.C., filed July 26, 1978); Fulk v. Bagley, No. C-78-333-WS (M.D.

N.C., filed July 26, 1978). Subsequently, the district court and the

Fourth Circuit denied that authority. Joint appellants below,

plaintiffs in both civil actions, were George W. Fulk, Thomas

W. Shelton, William F. Suddeth, Webster A. Collins, Herbert R.

Morrison, Helen O. Morrison, W. O. Gregory (who recently, by

reason of illness, has requested leave of court to withdraw from

that action, but continues to be a claimant in the reorganiza-

tion proceedings), Glen A. Wilkinson and R. A. Gilbert, Trustee.

Because there are special statutory and equitable considera-

tions applicable solely to the employee claims asserted in Fulk,

in which Fulk, Shelton and Suddeth are plaintiffs, a separate

petition is being filed on behalf of those three persons.

3

ors’ estate by relieving it of the investors’ parallel claims *

against the company, the lower court reversed the bank-

ruptcy court’s order authorizing the trustee’s expendi-

tures. Although this case involves the specific question of

whether such expenditures are proper, it also raises the

broader question of whether a reorganization trustee

should be prohibited from taking economically prudent

steps which any reasonable fiduciary would wish to take.

Reorganization proceedings involving The Washington

Group, Inc. (“Washington Group” or “the company”)

and its subsidiaries (collectively “the debtors”) were

cormmenced in 1977.* Thereafter, the trustee in reorga-

nization conducted the investigation required by Rule

10-208(a) of the Federal Rules of Bankruptcy Proce-

dure * pertaining to the circumstances leading to the need

for reorganization. The trustee then filed a Rule 10-208

8 As used herein, the phrase “parallel claims” describes claims

which are actionable against both the debtor in a reorganization

proceeding and other defendants in a civil action; but for the

pendency of the reorganization proceeding, the debtor could also

be a defendant in such civil action. Successful prosecution of and

recovery upon such claims in the civil action would discharge the

debtor from any liability thereupon.

4 Chapter X, together with the rest of the Bankruptcy Act, has

been superseded by the Bankruptcy Reform Act of 1978, which

revised and recodified the existing federal] laws relating to liquida-

tions and reorganizations of insolvent debtors. Pub. L. No. 95-598,

11 U.S.C. prec. 101 note (Supp. III 1979). Cases commenced prior

to September 30, 1979, however, are to be “conducted and deter-

mined under [the Bankruptcy] Act as if [the Bankruptcy Reform]

Act had not been enacted, and the substantive rights of parties in

connection with any such bankruptcy case, matter, or proceeding

shall continue to be governed by the law applicable .. . as if the

[Bankruptcy Reform] Act had not been enacted.” Jd. There are,

in any event, no significant differences between the Bankruptcy Act

and the new Bankruptcy Code with respect to the issues in this case.

Subsequent references to the Bankruptcy Act will be to the 1976

edition of the U.S. Code. References to the Bankruptcy Reform Act

will be to Supp. III of the 1979 edition of the U.S. Code.

5 Subsequent references to the Federal Rules of Bankruptcy Pro-

cedure will be as follows: “Rule ——.”

4

report which documented the evidentiary support for

numerous claims available to the debtors and to Wash-

ington Group investors arising from apparent misman-

agement and fraud.

The trustee concluded that the debtors had substantial

mismanagement claims against certain former officers,

directors and other fiduciaries, including respondents

Gilley and Johnston. Fourth Circuit Appendix at 66-69

(“Fourth Cir. App.”). For example, in mid-1973 the

Washington Group management entered into an employ-

ment contract with Johnston extending over an eighteen-

year period and providing for total direct payments of

$5,750,000, an amount which grossly exceeded the value

of his actual or potential services io the company. Id. at

83-88. Another substantial claim identified by the trustee

pertained to the company’s gratuitous payment of the

legal fees incurred by its co-defendants in the case of

Shaffner v. Washington Group, Inc., No. C-37-WS-73

(M.D.N.C., filed Jan. 23, 1973). In Shaffner, shareholders

of the former Washington Mills Company, which was

merged with a company controlled by respondent Gilley

and Smith Bagley to form Washington Group, asserted

that the merger had been effected by means of fraud and

other unlawful acts. Fourth Cir. App. at 75-79. Although

the company probably had no obligation to indemnify its

co-defendants in Shaffner, it nevertheless assumed in set-

tlement the entire burden of paying $709,000 in legal fees

of all but one defendant. Jd. at 102-04. The trustee’s

report leaves little doubt that the debtors’ need for reor-

ganization under Chapter X resulted from mismanage-

ment and gross waste. Id. at 76-110.

The trustee’s report also revealed that the facts sup-

porting such claims of the trustee against various parties

also supported substantial securities fraud claims by

Washington Group investors against former management

and others, and that such claims might also be made

5

against Washington Group in the reorganization proceed-

ings on the theory of vicarious liability. Washington

Group financial statements had chronically overstated the

company’s earnings by a total of $6,624,000 during the

four-year period from 1973 to 1976, id. at 277-79; one

substantial item that was improperly reported was the

Johnston contract discussed above. Jd. at 278-74, 277.

Similarly, the trustee’s findings as to the Shaffner case

indicate that the Shaffner plaintiffs were fraudulently

induced to enter into a settlement whereby minority

shareholders were to be allowed to resell their shares to

the company for $19 per share, and that the minority

shareholders were thereafter fraudulently induced not to

tender their shares. Jd. at 82-83. Not only did Washing-

ton Group and its management issue materially false

financial statements during the relevant period,® but man-

agement also manipulated the market price of Washing-

ton Group stock by, for example, stripping the debtors’

employee benefit plans of such “blue chip” securities as

IBM, Xerox and CBS in order to purchase common stock

in the Washington Group, id. at i05-10,’ pressuring em-

ployees to buy stock (while deterring any sales) and

otherwise artificially increasing stock demand and reduc-

ing supply. In this fashion, management created a false

picture of prosperity which could not help but mislead

the investing public in general and the members of the

Shaffner plaintiff class in particular. Jd. at 82-83.

* Reported earnings for 1973 were $3,011,552, whereas the com-

pany actually suffered a loss of $1,450,176 during that year. Fourth

Cir. App. at 24.

7 The blue chip stocks were sold at a loss of nearly a half million

dollars, whereas their subsequent appreciation and dividend pay-

ments would have totalled over $400,000 as of June, 1978. Id. at

107-08. In contrast, Washington Group stock, which was pur-

chased for the plans at peak prices, is now all but worthless.

Id. at 106-10.

6

As a result of these and other findings, and recogniz-

ing the potential for multi-million dollar claims against

the estate, as well as the overlap in the trustee’s and the

investors’ claims against the ultimate wrongdoers, the

trustee applied for and received from the bankruptcy

judge an order, dated July 25, 1978 and hereinafter cited

as the July order, specifically authorizing the trustee to

assert his claims against officers, directors and others

identified in his report as wrongdoers and to join with

and assist defrauded investors in prosecuting such an

action.

In reliance on the July order and the trustee’s report,

the trustee and certain investors immediately filed a joint

action styled Gilbert v. Bagley, No. C-78-335-WS

(M.D.N.C., filed July 26, 1978) naming as defendants

all of the respondents herein and others incriminated by

the trustee’s report. The trustee’s Gilbert claims are

asserted on behalf of the Chapter X estate, whereas the

investors’ Gilbert claims are asserted on behalf of them-

selves and a class of all similarly situated persons. Nev-

ertheless, many of the investors’ claims are based on the

same facts as those of the trustee. Both the trustee and

the investor plaintiffs allege that the defendants breached

their fiduciary duties under North Carolina law. The

investor plairtiffs assert in addition that failure to dis-

close the financial consequences of those breaches violated

federal securities laws. In order to prove their overlap-

ping claims in the Gilbert action, both the trustee and the

investors will be required to set forth the significant fea-

tures of the company’s financial history from 1972 until

the commencement of the reorganization proceedings in

1977.

Subsequent to joining the investor plaintiffs in bring-

ing these and other claims in Gilbert, the trustee re-

quested the bankruptcy judge to clarify the July order

and to confirm that the trustee had authority to expend

7%

7

the debtors’ funds for costs, other than attorneys’ fees, in

Gilbert. In that request, the trustee observed that he and

the plaintiff investors had relied on the July order in com-

mencing Gilbert. Fourth Cir. App. at 297. He also indi-

cated that the manipulations and mismanagement alleged

in Gilbert and the companion action (Fulk v. Bagley)

might give rise to claims against the estate in the Chapter

X proceedings. Jd. at 299. Citing the substantial factual

and legal interrelationships among the trustee’s claims in

Gilbert, the investor plaintiffs’ claims in Gilbert, and the

employee plaintiffs’ claims in Fulk, the trustee stated

that

it would be very difficult, if not impossible, to segre-

gate that discovery and pretrial preparation that

would be of benefit, for example, solely to your Ap-

plicant [the trustee] as opposed to the class action

plaintiffs . . .. Discovery into these matters and the

offer of proof at the trials will clearly involve a

considerable overlap of facts and issues.

Fourth Cir. App. at 300. He concluded that “it would

be in the best interest of the continued administration of

these reorganization proceedings to assist in defraying

the reasonable and necessary costs” of prosecuting Gil-

bert. Id. On January 16, 1979, the bankruptcy judge,

finding the facts to be as stated by the trustee, issued an

order (“the January order”) granting the trustee’s re-

quest. Thus, the trustee and the bankruptcy judge both

concluded that assistance to the investor plaintiffs would

serve the economic interests of the estate.

Respondents, who are also defendants in Gilbert, but

participate in the Chapter X proceedings in their capaci-

ties as creditors and shareholders, challenged the January

order on appeal.* On September 5, 1979, the district

8In the court below, petitioners unsuccessfully opposed respond-

ents’ appeal from the January order on timeliness grounds, but

they do not seek certiorari as to that issue.

8

court ® vacated the January order and directed the bank-

ruptcy judge to deny the trustee authority to expend

funds of the debtors to defray the investors’ costs of

prosecuting their related claims in the Gilbert action.

Thereafter, the court of appeals adopted per curiam the

district court opinion and denied a timely Petition for

Rehearing and Rehearing En Banc.”

REASONS FOR GRANTING THE WRIT

I. THE DECISION OF THE COURT OF APPEALS

RAISES AN IMPORTANT AND RECURRING

QUESTION CONCERNING THE AUTHORITY OF

THE TRUSTEE IN REORGANIZATION WHICH

URGENTLY NEEDS RESOLUTION BY THIS

COURT

The court below denied Washington Group’s Chapter X

trustee the authority to cooperate with the company’s de-

frauded investors in the prosecution of their overlapping

claims against former management and others charged

with fraud. Such a holding contravenes this Court’s man-

date that legislation enacted for the purpose of protecting

investors be construed flexibly so as to accomplish its

remedial purposes. See, e.g., SEC v. Capital Gains Re-

search Bureau, Inc., 8375 U.S. 180, 195 (19638).

Congress’ primary objective in enacting Chapter X was

to insure adequate protection for public investors. SEC

* Jurisdiction of the district court was premised on 28 U.S.C.

§ 1834 and Rules 801 and 10-801.

10In the meantime, petitioners filed a proof of claims and other

documents in the Chapter X proceedings seeking to preserve the

rights of all defrauded investors to recover their losses from the

debtors under the theory of vicarious liability. Although the bank-

ruptcy judge has to date denied the petitioners any right to partici-

pate in the Chapter X proceedings, his order excluding their claims

has been appealed to the district court not only by the petitioners

but also by the SEC.

9

v. American Trailer Rentals Co., 379 U.S. 594, 614

(1965).2" A comprehensive study relied upon in the

formulation of Chapter X found investor-creditors of the

debtor in reorganization unable, due to inadequate fi-

nances and inexperience, to protect their interests with-

out assistance. SEC study, pt. II, at 1. Accordingly, the

Commission recommended that in reorganization the “pri-

mary emphasis be given to the protection of the interests

of investors.” Id. pt. I, at 897. The importance of in-

vestor protection was reemphasized by the Commission

in hearings on the bill which eventually became the

Chandler Act:

There is admittedly a widespread and national in-

vestor interest in these reorganization proceed-

ings. . . . The holdings are small, and individual

action by the security holders to protect themselves

is, in many cases, out of the question. They either

lack the funds, or the skill, the acumen or the initia-

tive to take matters into their own hands... . The

new system which is needed must afford not only a

shield but a sword for bona-fide investors and their

representatives... .

Proposed Chandler Act: Hearings on H.R. 6439 before

the House Comm. on the Judiciary, 75th Cong., 1st Sess.

163 (1987).

11 The protective features of Chapter X have been carried for-

ward into the new Bankruptcy Code. See 11 U.S.C. §§ 1102-1103

(Supp. III 1979) (enabling committees representing investors to

play a significant role in the reorganization proceedings); id.

§1104 (requiring appointment of examiner and/or trustee if

such appointment is in the interest of any of the debtor’s inves-

tors); id. §1109(a) (allowing SEC to raise, appear and be heard

on any issue arising in a reorganization case); id. §1125 (re-

quiring full written disclosure of all material information prior to

soliciting acceptance of reorganization plan).

12SEC, Report on the Study and Investigation of the Work,

Activities, Personnel and Functions of Protective and Reorganiza-

tion Committees (1987-1940) (“SEC study”).

10

The trustee is the “focal point” in the formulation and

negotiation of a reorganization plan for the protection of

public investors. H.R. Rep. No. 1409, 75th Cong., 1st

Sess. 43-44 (1937).%* Indeed, this Court in Caplin v.

Marine Midland Grace Trust Co. recogmzed the trustee

in reorganization as “the center of the statutory scheme.”

406 U.S. 416, 423 (1972). It is the trustee who is best

able to identify claims which inure directly or indirectly

to the benefit of the estate, since he possesses all records

of the debtor and conducts a thorough investigation of

the debtor’s affairs. 11 U.S.C. § 567 (1)-(3) (1976);

see 11 U.S.C. § 1106(a) (3)-(4) (Supp. III 1979). He

also occupies an advantageous position in identifying and

evaluating claims against the estate. While the trustee

is generally obligated to recognize such claims and to pre-

pare a plan for payment thereof out of the estate’s assets,

11 U.S.C. § 567(5)-(6) (1976); see 11 U.S.C. § 1106

(a) (2)-(5) (Supp. III 1979), parallel claims can be

satisfied in a way that involves substantially less expense

to the estate. When public investors have parallel claims,

the trustee can most efficiently protect those investors, as

well as maximize the eventual recovery for all creditors,

by assisting the investors in prosecuting their parallel

claims against former management and other wrong-

18 The Chapter X trustee’s manifold powers are set forth in 11

U.S.C. §§ 110, 586-589 (1976). These powers include the power to

“operate the business and manage the property of the debtor,” id. |

§ 589, as well as any “powers which [the debtor] might have exer-

cised for his own benefit, but not those which he might have exer-

cised solely for some other person.” Jd. § 110(a) ; see 4A Collier on

Bankruptcy {| 70.13[2], at 124 (14th ed. 1978). Under the new

Bankruptcy Code, the reorganization trustee has substantially

identical powers. See 11 U.S.C. §§ 541(a)-(b), 1106, 1108 (Supp.

III 1979). In the absence of fraud, dishonesty, incompetence or

gross mismanagement by current management, the debtor may re-

main in possession, and, if so, has the same powers as the trustee

would have. Id. § 1107.

a

11

doers. Such litigation assistance thus not only serves the

statutory goal of protecting public investors but also di-

rectly benefits the estate. oe

The primary benefit to the estate from such litigation

assistance is, of course, enhancement of the availability

of debtor assets for distribution to other creditors by

eliminating parallel claims against the estate which would

otherwise be prosecuted in the reorganization proceed-

ings.* Successful prosecution of parallel claims also re-

lieves the estate of the burden of prosecuting third-party

claims for indemnification against the actual wrongdoers.

Further, when, as in Gilbert, the trustee has overlapping

claims which he asserts in a joint lawsuit, assistance

rendered his co-plaintiffs will facilitate the prosecution of

his claims by avoiding substantial duplication of discov-

ery and proof. Cooperation between the trustee and the

investor plaintiffs will result in substantial savings to the

estate since, in exchange for bearing their comparatively

minimal litigation costs, the trustee will benefit from the

work of his co-plaintiffs’ counsel in pursuing their clients’

related claims. It is clear, then, that successful joint

prosecution of parallel and ove-lapping claims facilitates

both the negotiation and the ultimate success of the re-

organization plan. The court below, in holding that the

prosecution of the Gilbert action would not “direct[ly]

benefit” the estate, did not disagree with the trustee’s and

the bankruptcy judge’s assessment of the economic benefits

to the estate, but rather deemed such benefits insufficient

14 Tf the parallel claims were prosecuted in the reorganization,

the trustee would incur both litigation costs and attorneys’ fees,

not to mention the possibility of ultimate liability on the claims.

These expenditures would certainly exceed substantially the de-

frauded investors’ Gilbert litigation costs, exclusive of attorneys’

fees. Indeed, if the plaintiffs recover their litigation costs from

the defendants in Gilbert, these sums will be restored to the estate.

12

to justify the expenditures merely because they were

“indirect.” In re Washington Group, Inc., 476 F. Supp.

246, 252 (M.D.N.C. 1979) .*

In view of the burgeoning number of reorganizations

filed in recent years,’* it is crucial that the Court define

for both the reorganization trustee and potential investor

plaintiffs the scope of the trustee’s authority to cooperate

with third parties in the prosecution of parallel and over-

lapping claims when successful prosecution thereof will

eliminate claims against the estate. Such cooperation,

which is of particular benefit to all except the wrong-

doers, has been approved by various courts in a number

of different forms, depending upon the circumstances of

each case.’’ By obtaining authorization to cooperate with

investors in the Gilbert action, the trustee sought to

eliminate several million dollars in claims against the

estate by defraying the comparatively minor out-of-pocket

costs of litigating the related claims of his co-plaintiffs

16 If the lower court intended to rule that a trustee may not

expend estate resources to minimize outflow from the estate, but

only to maximize income, it was clearly wrong as a matter of law.

See, e.g., 11 U.S.C. § 47(a) (9) (1976) (trustee must “examine all

proofs of claim and object to the allowance of such claims as may

be improper’); id. §64(a)(1) (trustee may incur such expenses

as are necessary to preserve the estate).

16 A total of 3,975 reorganizations were filed in 1975. By con-

trast, during the 12-month period from October 1, 1979 to Septem-

ber 30, 1980, total filings numbered 5,745. Admin. Office of the

U.S. Courts, Tables of Bankruptcy Statistics (1979); Annual Re-

port of the Director of the Administrative Office of the U.S. Courts

(1979 & 1980 eds.).

17 F.g., In re Equity Funding Corp. of Am., 519 F.2d 1274, 1276

(9th Cir. 1975) (litigation fund established by trustee pursuant to

compromise) ; In re Equity Funding Corp. of Am., 416 F. Supp.

182, 154 (C.D. Cal. 1975) (litigation fund in reorganization plan) ;

In re Four Seasons Nursing Centers of Am., Inc., 357 F. Supp. 594,

604 (W.D. Okla. 1973) (right to apply for loan to be used as

litigation “war chest’’).

13

against management and other wrongdoers. The case pro-

vides but one illustration of the practical importance of

trustee assistance in civil actions. Yet if the Fourth Cir-

cuit decision is allowed to stand, it will tie the hands

of reorganization trustees by denying them the authority

to cooperate, financially or otherwise, in the prosecution

of related claims.

Similarly, if the lower court’s decision is allowed to

stand, it will pose a dilemma for all persons having

claims which might be filed in a reorganization proceed-

ing or against other parties, or claims which might be

joined with a trustee’s claim against others.** As a result

of that decision, any such claimant who relies on the trust-

ee’s assistance in prosecuting a civil action risks the loss,

not only of his civil action claims, but also of his claims

in the reorganization proceedings.’® On the other hand,

18 The pressing need for resolution of the issue of the trustee’s

authority to assist in third-party civil actions is evidenced by the

numerous cases in which reorganization claimants have had paral-

lel claims. See, e.g., Dietrich Corp. v. King Resources Co., 583

F.2d 1148 (10th Cir. 1978); American Employers’ Ins. Co. v. King

Resources Co., 556 F.2d 471 (10th Cir. 1977); In re Farrington

Mfg. Co., 540 F.2d 658 (4th Cir. 1976); In re Four Seasons Nurs-

ing Centers of Am., Inc., 472 F.2d 747 (10th Cir. 1973); In re

Credit Indus. Corp., 8366 F.2d 402 (2d Cir. 1966); In re Associated

Gas & Elec. Co., 149 F.2d 996 (2d Cir.), cert. denied, 8326 U.S. 7386

(1945); In re Equity Funding Corp. of Am., 416 F. Supp. 182

(C.D. Cal. 1975) ; Dorfman v. First Boston Corp., Fed. Sec. L. Rep.

(CCH) { 94,155 (E.D. Pa. 1973); Carpenter v. Hall, 311 F. Supp.

1099 (S.D. Tex. 1970).

19 Petitioners herein, having relied on the trustee to defray the

costs of the Gilbert action, are now in that unenviable position.

The district court has indicated that the final decision as to the

propriety of the trustee’s commitment to fund the costs of the

civil action may be dispositive as to class certification, because the

plaintiffs’ possible inability to defray these costs will render them,

, 14

if he should decline to cooperate with or to accept assis-

tance from the trustee, he would be turning his back on

a natural ally.

Most importantly, until this Court clarifies the scope

of the trustee’s authority, federal courts will be unable

to streamline the complex litigation that inevitably arises

when companies are forced into reorganization by the

misdeeds of their management. Under the lower court’s

decision, overlapping and parallel claims would have to

be prosecuted in different proceedings, first in the reorga-

nization proceeding against the debtor and then in a sep-

arate action against the former management and others

charged with such misdeeds. Moreover, the trustee must

assert third-party claims for indemnity or contribution

against the latter, which claims may well have to be liti-

gated in yet a third action. In contrast, the litigation

plan adopted by the trustee and defrauded investors

herein contemplated complete resolution of all issues in a

single civil action.

The specific question of a trustee’s authority to fund

joint civil actions has not yet been decided by this Court.

Nevertheless, the lower court’s opinion relied heavily and,

it is respectfully submitted, incorrectly upon the opinion

of this Court in Caplin v. Marine Midland Grace Trust

Co., 406 U.S. 416 (1972), despite the fact that the “sole

in the district court's view, inadequate as class representatives.

See Gilbert v. Bagley, 492 F. Supp. 714, 720 n.1 (M.D.N.C. 1980).

Thus, recovery in the civil action may be foreclosed by the Fourth

Circuit’s decision. Ironically, petitioners’ reliance upon the trustee’s

assistance in the civil action may also result in the forfeiture

of their claims in the reorganization proceedings. The bankruptcy

judge has ruled that the investor-creditors are not entitled to pur-

sue their claims in the Chapter X proceedings because their accep-

tance of the trustee’s assistance estops them from proceeding against

him notwithstanding that the district court has withdrawn such

assistance. As noted above, the bankruptcy judge’s estoppel ruling

is currently before the district court on appeal.

-%

15

issue” presented in Caplin was whether the trustee had

standing to sue a debenture trustee on behalf of persons

holding debentures of the debtor. 406 U.S. at 416.” In

a 5-4 decision, this Court held that the trustee lacked

such standing. However, no question of trustee standing

is presented here. As the lower court itself observed,

Washington Group does not involve trustee standing, but

rather “ ‘the appropriateness of litigation-related expend-

itures which may benefit the estate.’” In re Washington

Group, Inc., 476 F. Supp. 246, 251 (M.D.N.C. 1979). It

nevertheless reasoned that the trustee should not be al-

lowed “to do indirectly what Caplin forbids his doing

directly.” Id. at 252."

This case provides the Court with an opportunity to

determine whether Caplin should be read so broadly that

it constitutes a strait jacket disabling the trustee from

cooperating with investors having common litigation in-

terests as well 2s potential claims against the estate. A

decision by this Court clarifying the scope of Caplin

would provide much needed guidance for future reorgani-

20 Caplin denied standing for three reasons. First, the Court

found no statutory basis for granting the trustee standing. 406

U.S. at 428-29. (No standing question is presented in the case at

bar.) Second, the Court feared that the trustee’s suit would be

inconsistent with independent actions which might be brought by

individual debenture holders. Jd. at 481-34. (In Gilbert, the

trustee’s claims are closely related to, and not inconsistent with,

the investors’ overlapping claims.) Third, due to the doctrine of

subrogation, recovery by the trustee in Caplin would not have

benefited the estate, since to the extent that the debenture holders

recovered against the debenture trustee, the debenture trustee

would in turn be subrogated to their claims against the estate. /d.

at 429-81. (There is no subrogation issue in the instant case since

satisfaction of claims against former management and other actual

wrongdoers would extinguish claims against the company.)

21 In so finding, the court below ignored a prior Fourth Circuit

decision mandating the award of fees and costs to a trustee’s

counsel for his assistance to defrauded investors in a related civil

action. See In re Farrington Mfg. Co., 540 F.2d 658 (4th Cir.

1976).

16

zation trustees and claimants. Caplin itself provides

some guidance as to the extent of a trustee’s ability to

assist independent civil class actions, but that guidance

appears to conflict with the lower court’s conclusion that

the trustee must be prohibited from undertaking any

such assistance. For instance, the Caplin Court suggested

the initiation of class actions as a means of avoiding the

trustee standing problem. Id. at 433.7 Moreover, Mr.

Justice Marshall recognized that, “[i]n enacting Chapter

X, Congress had protection of public investors primarily

in mind.” 406 U.S. at 422. Yet the lower court’s decision

in this case would deny the trustee authority to pursue

what is generally the most expedient and least costly

method of protecting those investors: cooperation in the

prosecution of related civil action claims. Furthermore,

the Caplin majority emphasized the importance of reduc-

ing and simplifying litigation. 406 U.S. at 482. This

goal would be frustrated if defrauded investors having

parallel claims were forced to prosecute their claims in a

reorganization proceeding and the trustee were thereafter

compelled to pursue his resulting claims for indemnifica-

tion or contribution in an independent action.” In con-

22 A major factor underlying the Court’s refusal to confer stand-

ing was its concern that the trustee was substituting his judg-

ment for that of the debtor’s debenture holders in bringing suit

on their behalf, and that any such suit might conflict with inde-

pendent actions brought by those same debenture holders. 406 U.S.

at 481-82. No such danger exists where, as in the instant case,

the trustee pursues only the claims of the debtors and assists his

co-plaintiffs in prosecuting their claims, thereby eliminating paral-

lel claims against the estate.

28 Recovery by the investor plaintiffs of their claims against the

estate in the reorganization proceedings would obligate the trustee

to pursue the same defendants for indemnification or contribution.

See Marrero v. Abraham, 478 F. Supp. 1271, 1275-78 (E.D. La.

1979) ; McLean v. Alexander, 449 F. Supp. 1251, 1266-67 & n.49

(D. Del. 1978), rev’d on other grounds, 599 F.2d 1190 (3d Cir.

1979). See generally Fischer, Contribution in 10b-5 Actions, 38

Bus. Law. 1821, 1828-27 & n.12 (1978). The uncertain state of the

17

trast, by embarking upon a sound litigation plan similar

to the one adopted in this case, the trustee can reduce and

simplify the litigation by consolidating all issues in a

single civil action, pitting the defrauded investors directly

against the former management and other actual tort-

feasors without interposing the corporate entity first as a

defendant under the doctrine of vicarious liability and

then as a plaintiff under theories of contribution and/or

indemnity.* Such a litigation plan would avoid circuity

of action and at the same time speed resolution of the un-

encumbered reorganization proceedings, all clearly within

the spirit of the Caplin decision.

law as to implied rights of contribution, see, e.g., Northwest Air-

lines, Inc. v. Transcript Workers Union, 49 U.S.L.W. 8423 (U.S.,

argued Dec, 2, 1980) (No. 79-1056), argues even more forcefully

in favor of allowing the trustee to act as he did in this case: If

contribution were not available, the estate would risk liability

for the entire amount of the investors’ claims unless their civil

action against former management and other wrongdoers were

to succeed.

*% Such a plan would not have eliminated claims against the

estate or otherwise benefited the estate in Caplin because success-

ful prosecution of the debenture trustee in the civil action would

merely have enabled the debenture trustee to file identical claims in

the Chapter X proceedings as subrogee of the debenture holders.

406 U.S. at 480-31. By contrast, if the plaintiffs are victorious in

the Gilbert action, the defendants will not be subrogated to the in-

vestors’ claims and thus cannot pursue those same claims against

Washington Group in the reorganization proceedings. The doc-

trine of subrogation is inapplicable in Gilbert since any claims

which the investors have against Washington Group are based

solely on its vicarious liability for the acts of its agents. Compare

Restatement of Security § 141 (1941) with Wallenius Bremen

G.m.b.H. v. United States, 409 F.2d 994, 998 (4th Cir. 1969), cert.

denied, 398 U.S. 958 (1970); Restatement (Second) of Agency

§ 489-440; see also id. §§ 401 & comment d, 4388 & comment b

(1958). Neither former management nor any of the other re-

sponsible parties would be entitled to seek indemnification or

contribution from the company in the event that they were held

liable to the investors in the civil action. In re Equity Funding

Corp. of Am., 416 F. Supp. 182, 156 (C.D. Cal. 1975).

18

Il. REVIEW OF THE JUDGMENT BELOW IS RE-

QUIRED TO RESOLVE THE CONFLICT BETWEEN

CIRCUITS

The Ninth Circuit has expressly authorized the trustee

in reorganization to defray the cost of prosecuting paral-

lel claims in related civil actions. In re Equity Funding

Corp. of America, 519 F.2d 1274, 1276 (9th Cir. 1975).

That same authority has now been denied by the Fourth

Circuit. As a result of this conflict between the circuits,

the right to rely on the assistance of a reorganization

trustee is wholly dependent upon the fortuity of the loca-

tion of the reorganization proceedings.

The Ninth Circuit in Equity Funding upheld then Dis-

trict Judge Pregerson’s approval of the compromise of

$314,000,000 in fraud claims in an Illinois liquidation

proceeding against a subsidiary of the debtor in reorgani-

zation, whereby the sum of $1,250,000 in estate assets

was allocated by the trustee to defray the costs of prose-

cuting claims in related civil litigation.” Quite properly,

the court did not question the trustee’s authority to pro-

vide financial assistance to the fraud claimants in the

25 Various creditors and shareholders of the debtor, in addition

to filing claims in the reorganization proceeding, had filed civil

actions against the debtor’s insolvent Illinois subsidiary, which was

outside the jurisdiction of the bankruptcy court, and against certain

fiduciaries of the debtor and its subsidiaries, All such actions were

thereafter consolidated. The fact that allocation of estate assets

to this civil litigation was effectuated in a state liquidation pro-

ceeding does not diminish its precedential value, since both the

bankruptcy court and the Ninth Circuit approved such payment.

Indeed, the fund was later supplemented by the transfer, pursuant

to the reorganization plan, of $250,000 into the registry of the

civil action court. In re Equity Funding Corp. of Am., 416

F. Supp. 182 (C.D. Cal. 1975). The sum, approved by Judge

Pregerson, was to be used “for the benefit of the plaintiff classes

as may be defined by the [civil action] Court, in such manner as

said Court may order.” Jd. at 154. A similar provision was ap-

proved in In re Four Seasons Nursing Centers of Am., Inc., 357

F. Supp. 594, 604 (W.D. Okla. 1973).

19

related civil action. Rather, it focused on whether the

trustee’s decision to settle rather than litigate the fraud

claims was reasonable under the circumstances,

The decision of the Fourth Circuit Court of Appeals in

Washington Group is in direct conflict with that of the

Ninth Circuit in Equity Funding. The Ninth Circuit

permits the trustee in reorganization to defray the costs

of a civil action to which he is not even a party. A for-

tiori, the trustee would be permitted to assist his co-

plaintiffs in a joint civil action, where such assistance

would benefit the estate not only by eliminating parallel

claims but also by facilitating the prosecution of the

trustee’s claims. The Fourth Circuit, ignoring Equity

Funding, denies the trustee such authority.

CONCLUSION

For the reasons set forth above, a writ of certiorari

should issue to review the judgment of the Court of Ap-

peals for the Fourth Circuit. Alternatively, if the Court

grants the related petition in Fulk v. Johnston (see note

2 supra) without also granting this petition, petitioners

respectfully suggest that the Court defer action on this

petition pending resolution of the Fulk case.

Respectfully submitted,

CALVIN H. Coss, JR.

STEPTOE & JOHNSON

1250 Connecticut Avenue, N.W.

Washington, D.C. 20086

T. WINFIELD BLACKWELL, JR.

JACK F’, CANADY

BLACKWELL, BLACKWELL,

CANADY & ELLER

2100 Wachovia Building

Winston-Salem, N.C, 27102

HENRY A. MITCHELL, JR.

CARL N. PATTERSON, JR.

SMITH, ANDERSON, BLOUNT,

DORSETT, MITCHELL &

4 JERNIGAN

P.O. Box 31

Raleigh, N.C, 27602

Attorneys for Petitioners

April 1981

Appendices

la

APPENDIX A

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

No. 79-1644

DAVID R. JOHNSTON ; THE NORTHWESTERN BANK;

. JAMES R. GILLEY,

versus Appellees,

R. A. GILBERT, Trustee,

Appellant,

IN THE MATTER OF:

THE WASHINGTON GROUP, INC.;

CONVENIENT SYSTEMS, INC. ;

WASHINGTON MILLS COMPANY;

JOHNSTON MILLS EXPORT COMPANY;

SPINNERS PROCESSING COMPANY ;

WASHINGTON WEAVING COMPANY;

WASHINGTON MILLS SALES CORPORATION,

Debtors.

No. 79-1653

DAVID R. JOHNSTON ; THE NORTHWESTERN BANK;

JAMES R. GILLEY,

wawuiees Appellees,

GEORGE W. FULK, THOMAS W. SHELTON and

WILLIAM F. SUDDETH,

. Appellants,

IN THE MATTER OF:

THE WASHINGTON GROUP, INC. ;

CONVENIENT SYSTEMS, INC. ;

WASHINGTON MILLS COMPANY;

JOHNSTON MILLS EXPORT COMPANY;

SPINNERS PROCESSING COMPANY;

WASHINGTON WEAVING COMPANY and

WASHINGTON MILLS SALES CORPORATION,

Debtors.

2a

No. 79-1654

DAVID R. JOHNSTON ; THE NORTHWESTERN BANK;

JAMES R. GILLEY,

Appellees,

versus

WEBSTER A. COLLINS, HERBERT R. MORRISON,

HELEN O. MORRISON, W. O. GREGORY, and

GLEN A. WILKINSON,

Appellants,

IN THE MATTER OF:

THE WASHINGTON GROUP, INC.;

CONVENIENT SYSTEMS, INC. ;

WASHINGTON MILLS COMPANY;

JOHNSTON MILLS EXPORT COMPANY;

SPINNERS PROCESSING COMPANY ;

' WASHINGTON WEAVING COMPANY and

WASHINGTON MILLS SALES CORPORATION,

Debtors.

Appeal from the United States District Court for the

Middle District of North Carolina, at Winston-Salem.

Robert R. Merhige, Jr., District Judge

Argued October 6, 1980 | Decided November 4, 1980

ca

Before HAYNSWORTH, Chief Judge, BUTZNER and

SPROUSE, Circuit Judges

O. William Faison; Calvin H. Cobb, Jr. and Howard H.

Stahl (James D. Hutchinson, John D. Alkire, Peter L.

Wellington, Steptoe & Johnson; C. Edwin Allman, R.

Bradford Leggett, Hatfield & Allman; T. Winfield

-%

”S

8a

Blackwell, Jr., Jack F. Canady, Jack E. Thornton, Jr.,

Blackwell, Blackwell, Ganady & Eller; Henry A. Mitchell,

Jr., Carl Patterson, Smith, Anderson, Blount, Dorsett,

Mitchell and Jernigan on brief) for Appellants; W.

Donald Carroll, Jr. (Jonathan E. Buchan, Helms, Mul-

liss & Johnston on brief) ; John H. Northev, III (Caudle,

Underwood & Kinsey on brief); Roy G. Hall, Jr. (Hall

and Liner on brief) for Appellees.

PER CURIAM:

The trustee in a Chapter X bankruptcy proceeding

and past and present shareholders and employees of the

debtor corporations appeal a district court judgment

vacating two orders entered by the bankruptcy judge.

These orders authorized the trustee to expend funds from

the debtors’ estate to defray the costs of two class action

suits brought by employees, shareholders and, in one

case, the trustee as a co-plaintiff against former officers,

directors and fiduciaries of the debtors. The appellants

primarily contend that the district court erred in holding

that the trustee was not entitled to use funds in this

manner. The parties also raise a number of threshold

and procedural issues, including the correctness of the

district court’s ruling that the time to appeal the bank-

ruptcy judge’s orders should have been extended on

grounds of excusable neglect.

We affirm for reasons sufficiently stated by the district

judge in his opinion. In re Washington Group, Inc.,

476 F. Supp. 246 (M.D.N.C. 1979). We also find that

those issues not governed by the opinion below do not

compel a contrary result, and merit no further discussion.

Affirmed.

4a

APPENDIX B

IN THE UNITED STATES DISTRICT COURT

FOR THE MIDDLE DISTRICT OF

NORTH CAROLINA

Winston-Salem Division

In Chapter X

Reorganization Numbers

B-77-695 B-77-696

B-77-697 B-77-698

B-77-699 B-77-700

B-77-701 B-77-702

[Filed Sept. 5, 1979]

IN THE MATTER OF:

THE WASHINGTON GROUP, INC.,

CONVENIENT SYSTEMS, INC.,

WASHINGTON MILLS COMPANY,

JOHNSTON MILLS COMPANY,

JOHNSTON MILLS EXPORT COMPANY,

SPINNERS PROCESSING COMPANY,

WASHINGTON WEAVING COMPANY and

WASHINGTON MILLS SALES CORPORATION,

Debtors.

MEMORANDUM

This matter is before the Court on appeal from an

order of the Bankruptcy Court. The following two issues

are presented: (1) whether in the circumstances of this

case the Bankruptcy Judge erred in denying appellants

an extension of time within which to file their appeal to

this Court, and (2) whether the Bankruptcy Judge erred

in allowing the Trustee in Bankruptcy to expend funds

of the Debtors’ estate to assist in defraying the costs of

two potentially massive civil suits, in only one of which

5a

the Trustee is a named plaintiff, against former officers,

directors, and fiduciaries of the Debtors. The three ap-

pellants, David R. Johnston, James R. Gilley, and the

Northwestern Bank, are creditors and shareholders of the

bankrupt companies. Jurisdiction is proper under Bank-

ruptcy Rule 801 and 28 U.S.C. § 1334.

On June 20, 1977, Chapter X reorganization proceed-

ings commenced with respect to the Washington Group,

Inc. and its subsidiaries. R. A. Gilbert was appointed

Trustee in Bankruptcy, and he immediately began his

investigation and operation of the bankrupt corporations.

He filed his report to the Bankruptcy Court on June 30,

1978, and in that report he included facts pertaining to

potential causes of action available to the estate.

On July 21, 1978 and July 25, 1978, respectively, the

Bankruptcy Judge entered orders that (1) authorized

the Trustee to assist employees of the Debtors in secur-

ing compensation for losses occasioned by mismanage-

ment of employee benefit plans, and (2) authorized the

Trustee to sue on behalf of the estate and to join with

any other plaintiffs in such action. On July 25, 1978,

two civil class actions suits relating to the affairs of

the Debtors were filed in this court. Gilbert v. Bagley,

C-78-335-WS, and Fulk v. Bagley, C-78-333-WS. Gilbert

involves claims by the Trustee, on behalf of the Debtors,

asserting waste, mismanagement, and breach of fiduciary

duties by officers, directors, and other fiduciaries of the

Debtors. Additionally, Gilbert includes claims by certain

representative shareholders of the Debtor, The Wash-

ington Group, Inc., on behalf of a proposed class of such

shareholders, based on alleged securities law fraud and

related misconduct, as well as unlawful conduct during

the pendency and settlement of an earlier shareholders’

action. In Fulk, certain representative employees of the

Debtors, on behalf of a proposed class of such employees,

have asserted federal and common law claims arising

6a

out of abuses in the management of the debtor corpora-

tions’ various employee benefit plans by directors, officers,

and other fiduciaries of the Debtors. The Trustee is not

a party in Fulk. Discovery relative to class certifica-

tion issues has been completed in both actions. General

discovery, however, has been stayed pending resolution

of a criminal action against certain of the named

defendants.

On January 15, 1979, the Trustee filed an Applica-

tion with the Bankruptcy Court seeking express au-

thority to expend the funds of the Debtors for costs, other

than attorneys’ fees, in the Gilbert and Fulk actions, as-

serting that “it would be in the best interest of the

continued administration of these reorganization pro-

ceedings to assist in defraying the reasonable and neces-

sary costs of maintaining” the Fulk and Gilbert actions.

No notice was given to the Debtors’ creditors or stock-

holders. In an order dated January 16, 1979, without

the benefit of any hearing, the Bankruptcy Judge

granted the Application. That order stated in pertinent

part:

Upon the annexed Application of R. A. Gilbert,

Trustee of the above-named Debtors, the Court hav-

ing determined that said Application was one which

might be heard ex parte and the Court having found

as facts the matters stated in said Application; and

for sufficient reasons appearing and good cause

shown, it is

ORDERED, ADJUDGED AND DECREED that

the Trustee be and he is hereby authorized to use

the funds of the Debtors to assist in defraying the

reasonable and necessary costs of maintaining the

two class actions known and designated as Gilbert,

et al. v. Bagley, et al. and Fulk, et al. v. Bagley,

et al., which class actions are presently pending in

the United States District Court for the Middle

District of North Carolina, save and except pay-

ment of professional fees of the attorneys for the

class action plaintiffs.

The Clerk did not, nor was he directed to, send copies

or other notice of this order to counsel for any of the

creditors herein.

The ten day period within which to appeal this order

expired on January 26, 1979. On February 9, 1979,

David R. Johnston and the Northwestern Bank both filed

Notices of Appeal from the January 16, 1979 order.

On the same date, Johnston and Northwestern requested

pursuant to Bankruptcy Rule 802(c) that the Bank-

ruptcy Judge retroactively extend the ten-day period.

On February 12, 1979, James R. Gilley filed his Notice

of Appeal from the January 16, 1979 order, but did

not request a retroactive extension of time. At a hearing

on February 27, 1979, the Bankruptcy Judge denied the

motions of Northwestern and Johnston for a retroactive

extension of time in which to appeal. An order to that

effect was entered on March 12, 1979. Northwestern

filed a Notice of Appeal from the March 12, 1979 order

on March 21, 1979, together with a Designation of Record

on Appeal and Statement of Issues. On March 23, 1979

Johnston filed a Notice of Appeal of the March 12, 1979

order, together with his Designation of Record on Appeal

and Statement of Issues.

On appeal before this Court, therefore, are the two

orders of the Bankruptcy Judge entered on March 12,

1979 and January 16, 1979, respectively. Consideration

of the earlier dated order is dependent upon a reversal

of the later order.

Any analysis of these questions must be predicated

upon an understanding of the overall context of and

relationship between the bankruptcy proceedings and

the pending civil actions. The three appellants in this

8a

action, James R. Gilley, David R. Johnston, and the

Northwestern Bank, are all defendants in Gilbert, and

appellants Gilley and Northwestern are defendants in

Fulk. Appellants Johnston and Northwestern, however,

are also creditors of the bankrupt Debtors, and it is in

this capacity that they are seeking to reverse the order

of January 16, 1979 authorizing expenditure of the

estate’s funds to support the Gilbert and Fwlk actions.

Appellant Gilley is the majority shareholder of the Wash-

ington Group, and he is similarly interested in prevent-

ing improper use of the Debtor’s limited resources. There-

fore, while these appellants all may legitimately attack

an order the effect of which will be dilution of the bank-

rupts’ monies, the Court cannot help but be aware that

success on the issues now pending will redound to ap-

pellants’ benefit in their capacities as defendants in the

civil actions.”

The threshold inquiry is whether the Bankruptcy Judge

was mistaken in denying appellants’ motion for a retro-

action extension of the ten day appeal period. Bank-

ruptey Rule 802(c) requires that requests for extensions

be made within the ten day period, “except that a re-

quest made after the expiration of such time may be

granted upon a showing of excusable neglect.” As the

District Court for the Southern District of New York

has noted:

The question of excusable neglect is left to the

discretion of the Bankruptcy Court Judge whose de-

cision should not be set aside unless the ‘reviewing

1Tt is interesting to note that appellant Johnston apparently

is a defendant in Gilbert because the Washington Group bought

out his family’s closely held textile company and he remained on

as an employee. The complaint in Gilbert does not allege that

Johnston was an officer or director of the Washington Group, but

he admits to being a stockholder, leading the Court to wonder

whether he ought not to be a plaintiff rather than a defendant.

This question of course is not before the Court, and the Court

expresses no opinion relative thereto.

-%\

9a

court has a definite and firm conviction that the

court below committed a clear error of judgment

In re Gurda, 19 Collier Bankruptcy Cases 568, 569

(S.D.N.Y. 1979) (footnote omitted). For the reasons

that follow, the Court has concluded that the Bankruptcy

Court’s order of March 12, 1979 was clearly erroneous.

Notions of fundamental fairness impel a reviewing

court to look closely at actions taken ex parte. This is

especially so where a Trustee in Bankruptcy is asking

for approval of what could be substantial expenditure

of the Debtors’ funds. Creditors and shareholders of the

bankrupt estates have an absolutely legitimate interest

in monitoring the manner in which the estate’s resources

are spent, and the Trustee, as their legal representative,

owes them a duty to keep them informed of his activities.

See Bankruptcy Rule 10-209. That the instant appellants

also happen to be defendants in the Bagley and Fulk

actions does not in any way limit their right, as creditors

and shareholders, to be informed of, and in appropriate

circumstances, to participate in, important actions taken

by the Trustee. The Court therefore cannot help but

look initially with suspicion upon the actions taken in

this matter by both the Trustee and the Bankruptcy

Court.

Appellants have not cited, nor has the Court in its

research discovered, either a case or Bankruptcy Rule

precisely on point. Other than the broad principles enun-

ciated above, drawn from the general spirit of the bank-

ruptcy process, Bankruptcy Rule 10-209(b) (6) seems to

be the most nearly applicable provision. It provides that

the Trustees shall give all creditors and stockholders at

least twenty days notice of “the hearing on applications

for . . . reimbursements of expenses.” See also Rule 10-

216. Here, of course, the Trustee was not seeking re-

imbursement of expenses; rather, he was asking for a

blank check with which to draw an undetermined, but

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clearly substantial, amount from the funds of the

Debtors. The Court cannot imagine a clearer instance,

not explicitly covered by the Rules, in which notice to

creditors and shareholders would be appropriate.

Rule 922(a) requires the Bankruptcy Court to mail

notice of orders entered to any party who opposed the

entry of the order. No such notice was mailed with

regard to the January 16 order. The Trustee argues,

however, that notice was not required because no one

opposed his application. Though this may be technically

correct, the Court will not penalize appellants for their

failure to oppose an application submitted without no-

tice to them and decided without giving them an oppor-

tunity to be heard.

The Trustee also argues that the January 16 order

merely confirmed the authority already granted him

by the Bankruptcy Court in its orders of July 11 and

25, 1978, and that, because appellants did not appeal

those orders, they should not now be allowed to appeal

the January 16 order. Suffice it to say that, had the J uly

orders actually granted the Trustee the authority to use

the Debtors’ funds to help support the Gilbert and Fulk

actions, the Court is at a loss to understand why the

Trustee felt it incumbent to make further application

to the Bankruptcy Court.

Appellants and the Trustee agree that appellants did

not learn of the January 16 order until January 31.

They further agree that appellants Johnston and North-

western filed their notices of appeal nine days later. The

tenth day, February 10, was a Saturday, and appellant

Gilley filed his notice of appeal on Monday, February

12. This delay, with the attendant circumstances al-

ready discussed, quite clearly falls within the “excusable

neglect” exception to the Rule.802(a) requirement that

notices of appeal be filed within ten days. As the United

States Court of Appeals for.the Fourth Circuit has noted

* >

lla

in a related context: “Failure to learn of the entry of

judgment is the principal ground on which extensions

of time for appeal are granted.” Babich v. Clower, 528

F.2d 298, 295 (4th Cir. 1975). Accordingly, the March

12, 1979 order of the Bankruptcy Court denying ap-

pellants Johnston’s and Northwestern’s motions for ex-

tensions of time within which to appeal the order of

January 16, 1979 will be vacated, and the Bankruptcy

Court will be directed to grant the motions. Because the

Bankruptcy Court should have allowed appellants to file

notices of appeal regarding the order of January 16,

the Court will now consider the appropriateness of that

order.

As a general proposition, it is beyond dispute that the

Trustee’s duty is to act in the best interests of the

Debtors’ estate. Protection of the rights and interests of

creditors and shareholders, with which the Trustee is

charged, depends largely upon the success of the Trustee

in managing the estate, and his actions must be calcu-

lated to bring direct benefit to the estate. There is of

course no question regarding the Trustee’s authority to

sue on behalf of the estate. Expenditure of the estate’s

funds in this regard is entirely proper, for success by

the Trustee in Gilbert will accrue directly to the benefit

of the estate. Of concern to appellants, however, is use

of the estate’s resources to help prosecute actions by the

shareholder plaintiffs in Gilbert and all the plaintiffs in

Fulk. Should these plaintiffs prevail, not one dime of

their recovery will go into the treasury of the Debtors’

estate.

The Trustee asserts that expenditure of the estate’s

funds to help support the Gilbert action may be justified

on three grounds: !

(a) recovery by plaintiff stockholders in Gilbert

would eliminate claims which might otherwise be

made in the reorganization proceeding ... ; (b)

the close interrelationship of the claims of the

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Trustee . . . and the shareholder plaintiffs...

clearly indicates that a strong and vigorous prose-

cution of the shareholders’ claims through discovery

and into trial would prove to be a material benefit

to the discovery and proof of evidence to support the

Trustee’s claims; [and] (c) proof of matters which

support the basis for the claims of the plaintiff

shareholders against the defendants, insofar as these

claims are distinct from the Trustee’s action, could

. . » expedite and facilitate the objection to claims

which have been filed by certain of the defendants

in the reorganization proceedings.

With respect to Fulk, the Trustee argues that “[p]en-

sion-related claims are entitled to special consideration

in a reorganization proceeding and may even be entitled

to treatment as a first priority administrative expense.”

He further notes that the Trustee is charged with at-

tempting to continue operation of the Debtors’ estate,

and that this duty cannot be fulfilled without boosting

and maintaining the morale of the employees—a task

made much easier if compensation owed from employee

benefit plans is paid to the employees.

Notwithstanding the apparent logic of the Trustee’s

arguments, his authority is strictly prescribed by the

Bankruptcy Act. Congress might well have decided to

grant the Trustee broad license either to sue on behalf

of or provide financial assistance to third parties with

claims against the estate. The Court has concluded, how-

ever, that the Bankruptcy Act contemplates a narrower

range of options for the Trustee. He may only bring

actions and expend funds on behalf of the estate. If he

is successful, his duty is then to apportion, in accordance

with the provisions of the Act, whatever recovery he

reaps among the various parties with claims against the

estate. Claimants of course include creditors, sharehold-

ers, and in this case employees. The high priority af-

forded pension-related claims does not mean the Trustee

18a

may expend funds of the estate to support a class action

suit by employees, as meritorious as it may appear. It

theans instead that, when the time comes to attempt to

satisfy the obligations of the Debtors, employees thereof

are entitled to stand near the front of the line. That

shareholders and employees will no doubt have claims

against the estate does not justify the Trustee’s reaching

into the estate’s coffers to help them sue former officers,

directors, and fiduciaries of the estate. The shareholders

and employees’ causes of action against these defendants

are independent from whatever claims they may also

wish to pursue against the estate.

The leading case in this area, cited and relied upon by

both the Trustee and the appellants, is Caplin v. Marine

Midland Grace Trust Co., 406 U.S. 416 (1972). As the

Trustee notes in his brief, Caplin is a decision regarding

a “Trustee’s standing to sue, not... the appropriate-

ness of litigation-related expenditures whith may benefit

the estate.” That the Supreme Court did not have occa-

sion to address this latter issue does not prevent this

Court from applying to the instant case the principles

on which Caplin rests.

Caplin involved a suit brought by a Chapter X Trustee,

on behalf of those persons owning debentures issued by

the bankrupt company, against the indenture trustee for

breach of its duty owed to the debenture holders. The

Trustee in Caplin argued, among other things, that it

was in a “better position than debt investors to discover

and to prosecute claims based on the alleged failure of

an indenture trustee to live up to the provision of the

indenture.” Jd. at 427. The Court disagreed, noting

that “Congress has established an elaborate system of

controls with respect to indenture trustees and reorgani-

zation proceedings, and nowhere in the statutory scheme

is there any suggestion that the trustee in reorganiza-

tion is to assume the responsibility of suing third parties

on behalf of debenture holders.” Jd. at 428. Then, in a

lda

passage critical to the instant case, the Court referred

to 11 U.S.C. § 567(8), which is the pivotal provision af

the Bankruptcy Act prescribing the powers and duties

of the Trustee, and asserted that “there is nothing in

the section that enables [the Trustee] to collect money

not owed to the estate.” Jd. The rationale of the Court’s

holding in Caplin is unmistakable. The Trustee may only

act for the direct benefit of the estate. In asking this

Court to limit Caplin to cases where the Trustee actually

is suing on behalf of some third party claimant, as op-

posed to cases where the Trustee is merely footing the

bill, the Trustee is requesting the Court to allow him to

do indirectly what Caplin forbids his doing directly.*

For the foregoing reasons, the Court has concluded

that the Bankruptcy Court’s order of January 16, 1979

must be vacated, and the Trustee’s application of Janu-

ary 15, 1979 must be denied to the extent it sought

authority to use the funds of the estate to help support

claims other than that brought by the Trustee.

An appropriate order shall issue.

/s/ Robert R. Merhige

United States District Judge

* At least two other courts have applied this rationale. In

Rochelle v. Marine Midland Grace Trust Co., 56856 F.2d 523, 527

(9th Cir. 1976), Judge Hufstedler cited Caplin in summarily

affirming the district court’s dismissal of a suit brought by the

Trustee on behalf of the Debtor’s creditors and debenture pur-

chasers: “[A] reorganization trustee has no standing to maintain

the action on the part of any person or entity other than his

debtor corporation.” Similarly, in King v. Sharp, 68 F.R.D. 60, 68

(N.D. Tex. 1974), the Court noted that: “Congress has not seen

fit to endow a Chapter X Trustee with the freedom to champion

causes that will produce benefits to third parties. If the bankrupt

estate has no cause of action in its own right, then the Trustee

has no authority to institute suite as a class representative or

otherw.se for the benefit of third parties.”

i io cae MI aii SRN AUR eR aR RR UU NEM a i

|

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APPENDIX C .

IN THE UNITED STATES DISTRICT COURT

FOR THE MIDDLE DISTRICT OF

NORTH CAROLINA

Winston-Salem Division

In Chapter X

Reorganization Numbers

B-77-695 B-77-696

B-77-697 B-77-698

B-77-699 B-77-700

B-77-701 B-77-702

[Filed Sept. 5, 1979]

IN THE MATTER OF:

THE WASHINGTON GROUP, INC.,

CONVENIENT SYSTEMS, INC.,

WASHINGTON MILLS COMPANY,

JOHNSTON MILLS COMPANY,

JOHNSTON MILLS ExXPoRT COMPANY,

SPINNERS PROCESSING COMPANY,

WASHINGTON WEAVING COMPANY and

WASHINGTON MILLS SALES CORPORATION,

Debtors.

ORDER

For the reasons stated in the memorandum of the

Court this day filed, and deeming it proper so to do,

it is ADJUDGED and ORDERED as follows:

1. The orders of the Bankruptcy Court dated March

12, 1979 and January 16, 1979 are hereby vacated; and

2. The Bankruptcy Court is directed (a) to enter an

order granting appellants’ request for a retroactive ex-

tension of time within which to file their Notices of

l6a

Appeal, and (b) to enter an order denying the Trustee’s

application of January 15, 1979 requesting authority to

utilize funds of the Debtors to defray the costs of prose-

cuting Gilbert, et al. v. Bagley, et al., No. C-78-335-WS,

and Fulk, et al. v. Bagley, et al., No. C-78-333-WS, ex-

cept that the Trustee may utilize the Debtor’s fund to

prosecute that portion of the Gilbert action in which the

Trustee is suing on behalf of the Debtors’ estate:

Let the Clerk send copies of the memorandum and

this order to all counsel of record.

/s/ Robert Merhige

ROBERT MERHIGE

United States District Judge

17a

APPENDIX D

IN THE UNITED STATES DISTRICT COURT

FOR THE MIDDLE DISTRICT OF

NORTH CAROLINA

In Chapter X

Reorganization Numbers

B-77-695, B-77-696,

B-77-697, B-77-698,

B-77-699, B-77-700,

B-77-701, B-77-702

[Filed: July 25, 1979]

IN THE MATTER OF:

THE WASHINGTON GROUP, INC.,

CONVENIENT SYSTEMS, INC.,

WASHINGTON MILLS COMPANY,

JOHNSTON MILLS COMPANY,

JOHNSTON MILLS EXPORT COMPANY,

SPINNERS PROCESSING COMPANY,

WASHINGTON WEAVING COMPANY and

WASHINGTON MILLS SALES CORPORATION,

Debtors.

ORDER GRANTING AUTHORITY TO PROSECUTE

LEGAL ACTIONS BASED ON FRAUD,

MISCONDUCT, IRREGULARITIES, OR

MISMANAGEMENT OF THE

DEBTOR CORPORATIONS

At Greensboro, in said district, on the 25th day of

July, 1978.

Upon the annexed Application of the Trustee for the

above-named Debtors, the Court having found the facts

to be as stated therein, and for good cause shown; it is

18a

ORDERED that R. A. Gilbert, Trustee, be, and he is

hereby, granted permission and authority to take what-

ever action is deemed appropriate to assert claims or

causes of action based on fraud, misconduct, irregulari-

ties, or mismanagement of the Debtor corporations

against any and all corporations, entities or individuals

who might be deemed liable for such acts, and, if the

Trustee deems it appropriate, that he be, and he is here-

by, granted authorization to join with other plaintiffs in

the prosecution of such claims or causes of action.

/s/ Rufus W. Reynolds

RuFus W. REYNOLDS

Bankruptcy Judge

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APPENDIX E

IN THE UNITED STATES DISTRICT COURT

FOR THE MIDDLE DISTRICT

OF NORTH CAROLINA

In Chapter X Reorganization Numbers

B-77-695, B-77-696,

B-77-697, B-77-698,

B-77-699, B-77-700,

B-77-701, and B-77-702.

[Filed Jan. 15, 1979]

IN THE MATTER OF:

THE WASHINGTON GROUP, INC.,

CONVENIENT SYSTEMS, INC.,

WASHINGTON MILLS COMPANY,

JOHNSTON MILLS COMPANY,

JOHNSTON MILLS EXPORT COMPANY,

SPINNERS PROCESSING COMPANY,

WASHINGTON WEAVING COMPANY and

WASHINGTON MILLS SALES CORPORATION,

Debtors.

ORDER AUTHORIZING EXPENDITURE OF FUNDS

FOR COSTS IN PLENARY CLASS ACTIONS

At Greensboro, N. C., in said District, this 16th day

of January, 1979.

Upon the annexed Application of R. A. Gilbert, Trustee

of the above named Debtors, the Court having deter-

mined that said Application was one which might be

heard ex parte and the Court having found as facts the

matters stated in said Application; and for sufficient

reasons appearing and good cause shown, it is

7%

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ORDERED, ADJUDGED AND DECREED that the

Trustee be and he is hereby authorized to use the funds

of the Debtors to assist in defraying the reasonable and

necessary costs of maintaining the two class actions

known and designated as Gilbert, et al. v. Bagley, et al.

and Fulk, et al. v. Bagley, et al., which class actions are

presently pending in the United States District Court

for the Middle District of North Carolina, save and ex-

cept payment of professional fees of the attorneys for

the class action plaintiffs.

/8/ Rufus W. Reynolds

RuFus W. REYNOLDS

Bankruptcy Judge

2la

APPENDIX F

IN THE UNITED STATES DISTRICT COURT

FOR THE MIDDLE DISTRICT

OF NORTH CAROLINA

In Chapter X Reorganization Numbers

B-77-695, _ B-77-696,

c B-77-697, _ B-77-698,

B-77-699, B-77-700,

B-77-701, and B-77-702.

[Filed Mar. 12, 1979]

IN THE MATTER OF:

THE WASHINGTON GROUP, INC.,

CONVENIENT SYSTEMS, INC.,

| WASHINGTON MILLS CoMPANY,

JOHNSTON MILLS COMPANY,

JOHNSTON MILLS EXPORT COMPANY,

SPINNERS PROCESSING COMPANY,

WASHINGTON WEAVING COMPANY and

WASHINGTON MILLS SALES CORPORATION,

Debtors.

ORDER DENYING MOTIONS FOR EXTENSION OF

TIME IN WHICH TO FILE NOTICE OF APPEAL

At Greensboro, in said district, on the 12th day of

March, 1979.

This matter coming on for hearing and being heard

on the motions of The Northwestern Bank and David

R. Johnston seeking an extension of time in which to

file notice of appeal of an order entered by this Court

on January 16, 1979, and the Court finding that said

motions were not filed within ten days following the date

of entry of said order; and the Court having concluded

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22a

that it does not have authority under the provisions of

Rule 802(c) and Rule 10-801, Rules of Bankruptcy Pro-

cedure, to extend the time for filing notice of appeal

once the initial ten-day period has expired; and the

Court further concluding that if it did have such author-

ity, in the exercise of its discretion it would deny the

motions for extension of time in which to file notice of

appeal; it is

ORDERED that the motions filed on behalf of The

Northwestern Bank and David R. Johnston on February

9, 1979 seeking an extension of time for filing their

notices of appeal be, and the same hereby are, denied,

and since this Court has concluded it is without authority

to act, such denial is without prejudice to The North-

western Bank and David R. Johnston to renew and pre-

sent these same motions to the United States District

Judge.

/s/ Rufus W. Reynolds

RuFrus W. REYNOLDS

Bankruptcy Judge

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23a

APPENDIX G

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

No. 79-1644

Davip R. JOHNSTON; THE NORTHWESTERN BANK; et al.,

a Appellees

R. A. GILBERT, TRUSTEE,

Appellant

No. 79-1653

DAvip R. JOHNSTON; THE NORTHWESTERN BANK; et al.,

rs Appellees

GEORGE W. FULK, et al.,

Appellants

No. 79-1654

Davip R. JOHNSTON; THE NORTHWESTERN BANK; et al.,

ry Appellees

WEBSTER A. COLLINS, et al.,

Appellants

ORDER

On September 5, 1979 the district court reversed a

January 16, 1979 order of the bankruptcy court author-

izing the expenditure of funds and costs in two class

actions, the short styles of which are Gilbert v. Bagley,

No. C-78-885-WS (M.D. N.C.), and Fulk v. Bagley, No.

C-78-8338-WS (MD NC) [sic]. The expenditure of funds

24a

and costs was to be used by the trustee to aid and assist

in the prosecution of said civil suits on behalf of the bank-

rupt estate, which had been authorized by order dated

July 21, 1978.

Later, by opinion dated May 15, 1980, the bankruptcy

court, in an opinion in another but related matter, indi-

cated that its initial authority to proceed with the Gil-

bert and Fulk civil actions in the Middle District of

North Carolina, and the expenditure of funds for that

purpose, had been a mistake. Nevertheless, orders of the

bankruptcy court, above mentioned, of July 21, 1978 and

January 15, 1979, are yet extant, and, so far as we are

advised, are unmodified except by the order of the dis-

trict court of September 5, 1979, above mentioned, which

is the order appealed from.

No reason has been brought to our attention why the

orders of the bankruptcy court authorizing the trustee

to proceed with the Gilbert and Fulk cases, and authoriz-

ing the expenditure of funds on that account, could not

be later revoked by the bankruptcy court. If that were

done, the instant appeal might well be moot. But the

orders of the bankruptcy court of July 21, 1978 and

January 16, 1979 are yet in full force and virtue but

for the order of the district court appealed from.

We are thus of opinion the case is not now moot, and

it is accordingly ADJUDGED and ORDERED that the

motion to dismiss the appeal on account of mootness shall

be, and the same hereby is, denied.

With the concurrences of Judge Haynsworth and

Judge Hall.

/s/ H. Emory Widener

For the Court

25a

APPENDIX H

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

November 04, 1980

TO:

Henry C. Ikenberry, Esq. TT. Winfield Blackwell, Esq.

James D. Hutchinson, Esq. Jack F. Canady, Esq.

Howard H. Stahl, Esq.

Laura Stone, Esq. Roy G. Hall, Esq.

Charles G. Cole, Esq.

W. Donald Carroll, Esq. John H. Northey, Esq.

| Lloyd Caudle, Esq.

NOTICE OF JUDGMENT

Judgment was entered in Case No. 79-1653 this date.

The Court’s opinion is enclosed.

Petition for Rehearing (FRAP 40)

Filing Time

A petition may be filed within 14 days after judg-

ment. No extensions will be granted save for the

most compelling reasons. Requests based on grounds

such as miscalculation of time or a need to consult

with others will be peremptorily denied.

Purpose

A petition should only be made to direct the Court’s

attention to one or more of the following situations:

1. A material fact or law overlooked in the decision.

2. A change in the law which occurred after the

case was submitted and which was overlooked

by the panel.

3. An apparent conflict of another decision of the

Court which is not addressed in the opinion.

26a

The filing of a petition in order merely to reargue

the case is an abuse of the privilege.

Statement of Counsel

A petition shall contain an introductory statement

that, in counsel’s judgment, one or more of the situ-

ations exists which is described in the “Purpose Sec-

tion” discussed above. Thereafter, the points to be

raised, succintly stated, shall then be listed in the

statement. Lacking such a statement, the petition

will be returned to counsel without filing.

Form

The 15 page limit allowed by the Rule shall be ob-

served. The Court requires 15 copies of the peti-

tion; however, a pro.se party who is indigent may

file the original only.

Bill of Costs (FRAP 39)

Filing Time

A party to whom costs are allowed, who desires

taxation of costs, shall file a bill of costs within 14

days after judgment.

Mandate (FRAP 41)

Issuance Time

The mandate is issued 21 days after judgment. A

timely petition for rehearing will stay the issuance.

If the petition is denied, the mandate will issue 7

days later. If a stay of mandate is sought, only the

original of a motion need be filed.

WILLIAM K. SLATE, II

Clerk

Enclosure

4CCA 28

Rev. 9/17/79

27a

APPENDIX I

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

Nos. 79-1644, 79-1653, 79-1654

[Filed Jan. 19, 1981]

. DAvID R. JOHNSTON, THE NORTHWESTERN BANK,

JAMES R. GILLEY,

Appellees,

Vs.

R. A. GILBERT, TRUSTEE, GEORGE W. FuLK, THOMAS W.

SHELTON, WILLIAM F.. SUDDETH, WEBSTER A. COLLINS,

HERBERT R. MORRISON, HELEN O. MORRISON, W. O.

GREGORY and GLEN A. WILKINSON,

Appellants,

IN THE MATTER OF:

THE WASHINGTON GROUP, INC.,

CONVENIENT SYSTEMS, INC.,

WASHINGTON MILLS COMPANY,

JOHNSTON MILLS EXPORT Co.,

SPINNERS PROCESSING Co.,

WASHINGTON WEAVING Co., and

WASHINGTON MILLS SALES CorP.,

Debtors.

ORDER

Upon consideration of the petition for rehearing, no

request for a poll of the court being made on the sugges-

tion for rehearing en banc, and with the concurrence of

Judge Butzner and Judge Sprouse,

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28a

IT IS ORDERED that the petition be, and it is here-

by, denied.

FOR THE CouRT:

/s/ Clement F. Haynsworth

Chief Judge

Fourth Circuit

January 14, 1981

29a

APPENDIX J

Sections 70(a), 186, 187 and 189 of the Bankruptcy

Act, 11 U.S.C. §§110(a), 586, 587 and 589 (1976)

provide:

$110. Title to property

(a) The trustee of the estate of a bankrupt and his

successor or successors, if any, upon his or their appoint-

ment and qualification, shall in turn be vested by opera-

tion of law with the title of the bankrupt as of the date

of the filing of the petition initiating a proceeding under

this title, except insofar as it is to property which is

held to be exempt, to all of the following kinds of prop-

erty wherever located (1) documents relating to his prop-

erty; (2) interests in patents, patent rights, copyrights,

and trademarks, and in applications therefor: Provided,

That in case the trustee, within thirty days after appoint-

ment and qualification, does not notify the applicant for

a patent, copyright, or trade-mark of his election to

prosecute the application to allowance or rejection, the

bankrupt may apply to the court for an order reyesting

him with the title thereto, which petition shall be granted

unless for cause shown by the trustee the court grants

further time to the trustee for making such election;

and such applicant may, in any event, at any time peti-

tion the court to be revested with such title in case the

trustee shall fail to prosecute such application with rea-

sonable diligence; and the court, upon revesting the

bankrupt with such title, shall direct the trustee to exe-

cute proper instruments of transfer to make the same

effective in law and upon the records; (8) powers which

he might have exercised for his own benefit, but not those

which he might have exercised solely for some other per-

son; (4) property transferred by him in fraud of his

creditors; (5) property, including rights of action, which

prior to the filing of the petition he could by any means

have transferred or which might have been levied upon

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80a

and sold under judicial process against him, or otherwise

seized, impounded, or sequestered: Provided, That rights

of action ex delicto for libel, slander, injuries to the per-

son of the bankrupt or of a relative, whether or not

resulting in death, seduction, and criminal conversation

shall not vest in the trustee unless by the law of the

State such rights of action are subject to attachment,

execution, garnisment, sequestration, or other judicial

process: And provided further, That when any bankrupt,

who is a natural person, shall have any insurance policy

which has a cash surrender value payable to himself, his

estate, or personal representatives, he may, within thirty

days after the cash surrender value has been ascertained

and stated to the trustee by the company issuing the

same, pay or secure to the trustee the sum so ascertained

and stated, and continue to hold, own, and carry such

policy free from the claims of the creditors participating

in the distribution of his estate under the bankruptcy

proceedings, otherwise the policy shall pass to the trustee

as assets; (6) rights of action arising upon contracts, or

usury, or the unlawful taking or detention of or injury

to his property; (7) contingent remainders, executory

devises and limitations, rights of entry for condition

broken, rights or possibilities of reverter, and like inter-

est in real property, which were nonassignable prior to

bankruptcy and which, within six months thereafter,

become assignable interests or estates or give rise to

powers in the bankrupt to acquire assignable interests

or estates; and (8) property held by an assignee for the

benefit of creditors appointed under an assignment which

constituted an act of bankruptcy, which property shall,

for the purposes of this title, be deemed to be held by

the assignee as the agent of the bankrupt and shall be

subject to the summary jurisdiction of the court.

All property, wherever located, except insofar as it is

property which is held to be exempt, which vests in the

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bankrupt within six months after bankruptcy by bequest,

devise or inheritance shall vest in the trustee and his

successor or successors, if any, upon his or their appoint-

ment and qualification, as of the date when it vested in

the bankrupt, and shall be free and discharged from any

transfer made or suffered by the bankrupt after bank-

ruptcy.

All property, wherever located, except insofar as it is

property which is held to be exempt, in which the bank-

rupt has at the date of bankruptcy an estate or interest

by the entirety and which within six months after bank-

ruptcy becomes transferable in whole or in part solely

by the bankrupt shall, to the extent it becomes so trans-

ferable, vest in the trustee and his successor or succes-

sors, if any, upon his or their appointment and qualifi-

cation, as of the date of bankruptcy.

The title of the trustee shall not be affected by the

prior possession of a receiver or other officer of any court.

§ 586. Trustee; title

A trustee, upon his appointment and qualification, shall

be vested with such title as a trustee appointed under

section 72 of this title would have.

$587. Rights, powers, and duties of trustee

Where not inconsistent with the provisions of this

chapter, a trustee, upon his appointment and qualifica-

tion, shall be vested with the same rights, be subject to

the same duties, and exercise the same powers as a

trustee appointed under section 72 of this title, and, if

authorized by the judge, shall have and may exercise

such additional rights and powers as a receiver in equity

would have if appointed by a court of the United States

for the property of the debtor.

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§ 589. Operation of business and management of prop-

erty; reports

A trustee or debtor in possession, upon authorization

by the judge, shall operate the business and manage the

property of the debtor during such period, limited or

indefinite, as the judge may from time to time fix, and

during such operation or management shall file reports

thereof with the court at such intervals as the court may

designate. :

* a” a *

Rule 10-208 of the Federal Rules of Bankruptcy Pro-

cedure provides:

(a) Trustee. A trustee shall (1) file the lists as re-

quired by Rule 10-108; (2) unless otherwise ordered,

make a report at the meeting provided for in Rule 10-

212 which shall include a summary of his operations of

the business and inanagement of the property; (3) file

with the court within the times fixed by the court, peri-

odie reports and summaries of the operations of the

business, and such other information as may be required

by the court; (4) investigate the acts, conduct, liabilities

and iinancial condition of the debtor, the operation of its

business and the desirability of the continuance thereof,

and any other matter relevant to the case or to the

formulation of a plan; (5) file a report with the court

concerning any facts ascertained by him pertaining to

fraud, misconduct, mismanagement, and irregularities,

and to any cause of action available to the estate; (6)

if the court so authorizes, examine the directors and

officers of the debtor and any other witnesses concerning

the foregoing matters; (7) as soon as practicable, file

a statement of his investigations, and cause copies or a

summary thereof to be mailed to the creditors, stockhold-

ers, indenture trustees, the Securities and Exchange

Commission, and such other persons as the court may

designate; (8) notify creditors and stockholders that they

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may submit to him plans or suggestions for the formula-

tion of a plan, within a time fixed by him in such notice;

(9) file a plan or report as required by Rule 10-301 (c)

(1); (10) within 30 days after the date of the order

confirming the plan or within such other time as the

court may fix, file a report with the court concerning

the action taken by him and the progress made in the

consummation of the plan and file such further reports

as the court may direct until the plan has been consum-

mated; and (11) after consummation of a plan, file an

application for a final decree showing that the plan has

been consummated, and the names and addresses, if

known, of the holders of claims or interests which have

not been surrendered or released in accordance with the

provisions of the plan and the nature and amounts of

such claims or interests, and such other facts as may be

necessary to enable the court to pass upon the provisions

to be included in the final decree.

a BS * -